Business

Germany sparks eurozone gloom with downgrade

Europe’s growth engine stalls as carmakers hit the skids

Germany, the eurozone’s biggest economy, has downgraded its economic growth forecasts for the second time in three months, fuelling concerns over the overall state of the bloc’s economic health.

The German powerhouse, which accounts for a third of the eurozone’s economy, now forecasts growth of just 0.5pc for this year, half of what was expected back in January.

A recent revival in German industrial production after it ended the year in recession had cheered sentiment and raised hopes that the country’s manufacturing sector could perhaps be turning the corner.

Economics Minister Peter Altmaier punctured that optimism yesterday with his new forecast for the German economy – not only has the outlook been halved since January, it now stands at less than a third of the 1.8pc that was expected as recently as the end of last year.

A bellwether of how Chancellor Angela Merkel’s Germany Inc is doing is revealed in the latest figures from Volkswagen, the world’s largest carmaker.

In the year to March, VW’s sales fell 2.8pc from the same period last year. Its Porsche luxury brand was worst hit, with sales down 12.3pc.

Data from the European Automobile Manufacturers Association showed that in March 2019 car sales fell 3.9pc to 1.7m units. There was also an ugly set of first quarter numbers from US auto sales as General Motors and Fiat Chrysler both saw 7pc-plus declines in volume. Of course, Europe’s largest economy isn’t just a car plant, but the industry is hugely important and it exports 70pc-80pc of its output, according to investment bank ING.

ING also notes that while direct employment in the car industry is just 2pc of the total, when you add in second and third-round effects some 7-8pc of the economy is linked to it.

Economic consultancy TS Lombard notes that surveys also show German companies are holding inventory levels that are higher than at any time since the eurozone sovereign debt crisis hit, a measure that implies it will take a long time for growth to return.

An economic slowdown in China had been blamed for part of the decline in German exports, along with a new vehicle emissions testing regime and low water levels, although data released yesterday showed that growth in the world’s second largest economy came in better than expected at 6.4pc.

Even if China’s growth slowdown is not as great as expected, there remain plenty of risks for European manufacturers and Germany in particular.

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The European Commission has hit back with a list of $20bn of US products that could be targeted for tariffs in retaliation for a list from Washington in a long-running dispute over aircraft subsidies.

Europe and the US are also supposed to be holding talks on averting a trade war between the two in which German cars are in the front line with US President Donald Trump threatening to make sure there are no Mercedes-Benz cars rolling down New York’s Fifth Avenue.